Last
month, Japans Financial Services Agency (FSA) suspended
the operations of money management firm,
AIJ Investment Advisors, after it was unable to account for
the bulk of $2.6 billion in pension funds it managed on behalf
of 123 clients.

The
suspension follows the $1.7 billion accounting scandal at
the
Japanese camera maker Olympus,
which raised questions about the prevalence of white-collar
crime in Japan and the ability of Japanese financial regulators
to monitor offenders.

Japans
financial services minister, Shozaburo Jimi, last week
described the situation as deplorableand ordered a sweeping investigation into
the finances of 265 other money management companies in
Japan.

As part
of these investigations fund management companies will be
required to disclose more information on their operations
including whether they had set up investment trust funds
overseas and whether they use external auditors.

One
Tokyo-based fund manager told IFLR the AIJ incident
had revealed the fundamental weaknesses at the ground level of
Japans pension fund system.

It has,
for instance, become commonplace for the countrys mid-
and small-sized pension funds to hire only one or two dedicated
managers, often without the necessary skills or professional
background to manage pension funds.

Such
hires were often former employees of Japans scandal-hit
Social Insurance Agency which, before being abolished and
replaced by the Japan Pension Scheme in 2010, monitored
Japans pension fund policy at the national
level.

For
smaller funds, without the means to hire from big names such as
Goldman Sachs, ex-employees of the Social Insurance Agency
seemed the best option, the fund manager said. It
was assumed they would be well qualified to do a good
job.

The
regulations didnt effectively take those facts into
account, he said. And the gaps that developed
between industry assumptions and the regulatory reality created
room for the AIJ to manipulate those systematic
weaknesses.

The FSA
has been criticised for not monitoring the situation closer.
Thorough investigations are expected as a result to
properly address an issue which has now become the subject of
national debate,Nakamachisaid.

But he
questioned how deep the scrutiny could go.

It is
obvious now that certain small and mid-sized funds do not have
the ability to assess risks and manage themselves so perhaps
they might be better off selling with lower risk and thereby
lower returns, he added.

But if
the FSA imposes too rigid restrictions, for example by limiting
the investment options available to pension funds, it risks
stifling the market.

Japans
ruling party, the Democratic Party of Japan, last week
announced
plans to amend laws to require more stringent oversight of
asset management firms in a bid to prevent the recurrence of
such scandals.

Another
Tokyo-based partner at an international law firm, however, was
unconvinced much would change. There will obviously be amaterial
adjustment made. But drastic change would bring with it other
risks, he said, which authorities will understandably want to
avoid.